1. Prepare a monthly cash budget and supporting schedules for June, July, and August. 2. On the basis of the cash budget prepared in part (1), what recommendation should be made to the controller?
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
PR 22-4B
The controller of Mercury Shoes Inc. instructs you to prepare a monthly cash budget for
the next three months. You are presented with the following budget information:
June July August
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,000 $185,000 $200,000
Selling and administrative expenses . . . . . . . . . . . . . . . . . . . 40,000 46,000 51,000
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 120,000
The company expects to sell about 10% of its merchandise for cash. Of sales on account, 60% are expected to be collected in the month following the sale and the remainder
the following month (second month after sale).
tax expense represent $12,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in February, and the annual property taxes are paid in
November. Of the remainder of the manufacturing costs, 80% are expected to be paid in
the month in which they are incurred and the balance in the following month.
Current assets as of June 1 include cash of $42,000, marketable securities of $25,000,
and accounts receivable of $198,000 ($150,000 from May sales and $48,000 from April
sales). Sales on account in April and May were $120,000 and $150,000, respectively.
Current liabilities as of June 1 include $13,000 of accounts payable incurred in May for
manufacturing costs. All selling and administrative expenses are paid in cash in the period
they are incurred. An estimated income tax payment of $24,000 will be made in July.
Mercury Shoes’ regular quarterly dividend of $15,000 is expected to be declared in July
and paid in August. Management wants to maintain a minimum cash balance of $40,000.
Instructions
1. Prepare a monthly cash budget and supporting schedules for June, July, and August.
2. On the basis of the cash budget prepared in part (1), what recommendation
should be made to the controller?
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